After New Jersey Defeat, What Now for Tesla?

The Garden State moves to block Tesla's direct-to-consumer car sales, in the latest battle between Elon Musk and local car dealerships.

Entrenched interests in the Garden State won this round. Barring some last-minute turnaround, Elon Musk's Tesla Motors will not be allowed to sell its cars in New Jersey as of April 1. The reason, as we reported last week, is that New Jersey is the latest battleground in the state-by-state war between Tesla, which wants to sell its EVs directly to consumers, and associations of local car dealerships, which want to preserve the franchise system they've come to enjoy and block direct-to-consumer sales.

Tesla has been selling electric cars in the state for about a year, and reportedly had been working to come up with a legislative solution to work with or change the state's rules about carmakers having to sell vehicles through a franchised dealer. Then last week, the state's Motor Vehicle Commission passed a new set of rules that would severely curtail Tesla's ability to sell directly to the consumer. In multiple blog posts, the company pointed the finger at New Jersey governor Chris Christie, saying he reneged on a promise to delay the enforcement of these new rules until the company could work out a solution in the statehouse. Musk wrote that New Jersey's auto lobby "cut a backroom deal with the Governor."

Christie's response: Hey, don't look at me. He told reporters: "I'm not pushing Tesla out; the state Legislature did. They passed a law—which is still on the books—which says if you want to sell cars in this state, you must go through an authorized dealer. My job is not to make the laws, it's to enforce the laws. And Tesla was operating outside the law . . . . What they were asking for was an exception from the law. I'm not the king. I don't get to grant exceptions to the law."

New Jersey residents can still shop for a Model S online, or travel a short distance to stores in New York or Philadelphia. But beginning on April 1, Tesla's New Jersey stores will become "galleries"—places where shoppers can look but not buy (or even ask questions about pricing) as a way to get around the rules. And Tesla's legal battles persist in other states. In Ohio, the company is fighting a rule that would bar it from setting up new sites beyond the two it has already, in Cincinnati and Columbus. But it's not all bad: In Arizona, legislators have proposed to overturn anti-Tesla rules—perhaps because that state is in the running to be the site of one of Musk's new factories.

A few months back, we asked ourselves: Do the dealers have a case, and do we still need them? Or is this just an entrenched, powerful interest digging in against an upstart threatening its business model? The pro-dealership arguments we heard then:

• Car dealerships are local business, and local business is good for the economy.

• Because they're local people, car salesmen and dealership owners know what people in the community want.

This week The Wall Street Journal asked the same question of Jim Appleton, head of NJ CAR, New Jersey's state car-dealer association. His bullet points:

• "Manufacturers are congenitally incapable of fully and fairly honoring their obligations with respect to warranty and recall services because they see that as an expense, whereas the franchisee sees that as a revenue opportunity," he said, pointing to the current GM recall controversy as evidence.

• Tesla's vertical integration is bad for car buyers because "whatever the manufacturer wants them to pay for the vehicle is what they pay"—there's no competition among dealerships to draw in customers by slashing prices.

None of these arguments are all that convincing, at least in this case. Tesla, as a boutique, luxury company in a new market, takes famously good care of its customers (though it is hard to imagine the same kind of customer service from a giant like GM or Ford). And Tesla's cars are pricey, no doubt—the Model S starts at about $70,000. But would it really cost less if sold via franchised dealerships, where the dealership owner gets his or her cut?

It comes down to jobs and money, and that is why it's no surprise dealership associations are digging in their heels against Tesla despite the fact that Musk sells a minuscule percentage of all the cars sold in America. As veteran car salesman Tom Dougherty tells The Verge, "They wanted to go direct, which means no sales force. That's cutting out a lot of people. No way that's gonna fly."

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